It is more than a bit surprising that you now see Fed officials touting "simulations" to make unsupported assertions that their bond purchasing policy will create 3 million jobs!
And media reaction to this - simply to repeat the assertion and quote some of the usual suspects who disagree, rather than dig a bit deeper into the "simulation", its underlying assumptions and details, is a remarkable dereliction of responsibility...
This is living proof that Dr. Goebbels theory of the Große Lüge is alive and well. It also shows how obviously political the Fed has become, and how it is being used as a tool of U.S. fiscal policy!
Conclusion: this is clearly a signal that the Fed will continue its QE policy, and that it will support this policy by really any means necessary....so -- the task for U.S. asset holders should be to continue to diversify asset holdings, concentrating on those assets which will retain value against a depreciating dollar, over the longer term...
Could be time to put on some positions in CAD, other strong currencies, Gold, Grains, oil stocks...
From the Wall Street Journal
DENVER -- Federal Reserve Vice Chairwoman Janet Yellen issued one of the strongest and most detailed defenses to date of the Fed's controversial decision to buy more government debt to promote the U.S. economy's recovery.
Illustrating the results of Fed research to an audience of top economists from around the world, Yellen argued the central bank's purchase of U.S. Treasuries is helping boost jobs and prevented a dangerous slide in consumer prices.
"It will not be a panacea, but I believe it will be effective in fostering maximum employment and price stability," Yellen said in prepared remarks Saturday to the annual conference of the American Economic Association.
The Fed's $600 billion bond-buying program, which began in mid-November and is set to run through June, has met strong criticism both in the U.S. and abroad. Even a minority of Fed officials have spoken against. Many economists here have expressed skepticism it will do much to help the U.S. economy, with some warning it may do more harm than good by eventually leading to runaway inflation across the globe.
Yellen responded to each and every criticism, pointing to a recent Fed paper suggesting the bond purchases may help create 700,000 jobs. Together with a previous Fed program, in which the Fed bought mortgage and government bonds in 2009 and early 2010, around three million private-sector jobs may have been added thanks to the central bank's efforts.
The U.S. economy's 18-month-old recovery from the worst recession since the 1930s should speed up this year, Fed Chairman Ben Bernanke Friday told Congress, where some Republicans have attacked the Fed's move for fears it will spark inflation. But it will take many years to make up for all the jobs, Bernanke added, and that's why the Fed's continued support is needed.
The bond purchases, Yellen explained, help the economy by keeping borrowing rates low, driving investors into riskier assets like stocks, and lifting exports by keeping the value of the U.S. dollar low.
Defending the program from criticism it received by foreign officials ranging from Germany to Brazil, Yellen noted the bond purchases have not let to a sharp depreciation of the U.S. dollar as some feared. She said growth in foreign export-led economies should not be hurt if countries take the right measures; on the contrary, the global economy will benefit by an acceleration in the U.S. recovery.
In the program's first phase, when short-term interest rates were close to zero, the Fed purchased $1.25 trillion in mortgage bonds, along with hundreds of millions in agency and Treasury debt. It followed that with a decision to reinvest the proceeds of maturing mortgages into Treasurys. Then, late last year the Fed said it would buy an additional $600 billion in government bonds.
These actions have driven the Fed's balance sheet from around $800 billion at the start of the financial crisis in late 2007, to what the Fed research paper states will be $2.6 trillion by the middle of this year.
The paper came from the San Francisco Fed, where Yellen was president before joining the Fed Board in Washington DC in October 2010. It was authored by the San Francisco Fed's research chief John Williams, along with Federal Reserve Board economists Hess Chung, Jean-Philippe Laforte and David Reifschneider.
By injecting more money with the bond buys, the Fed warded off a dangerous slide into a deflationary environment that would have been caused by the economy's weakness, Yellen said. She expressed confidence that the Fed has the tools to unwind the program and lift interest rates when needed to prevent an accelerating economy from stoking inflation.
Some economists disagree. The Fed's easy money policy is a "serious mistake," according to Ronald McKinnon, a professor at Stanford University, who presented a paper at the AEA-ASSA meetings Friday.
By driving rates so low the Fed has made the global economy less stable, the paper argues, leading to beggar-thy-neighbor policies reminiscent of the international currency chaos that worsened the 1930s Great Depression.
McKinnon draws a parallel with the policies the U.S. followed under President Richard Nixon in the early 1970s, when an easy U.S. monetary policy forced other industrial countries to appreciate their currencies against the dollar, eventually leading to high inflation around the world.
However, other economists at the Denver conference appeared to side with the Fed. Speaking in the same panel as Yellen, Martin Feldstein, a Harvard University professor, said more government support is needed to help an economy that remains too weak to cut unemployment significantly.
Feldstein, a former economic aide of President Ronald Reagan, said the weak housing sector still poses a threat to the recovery because it can seriously hamper consumer spending, banks and the construction sector.
